There are scores of exchange traded funds with lengthy track records focusing on value stocks, but there are also some newer value ETFs that merit consideration. An ETF in the latter group is the Fidelity Value Factor ETF (NYSEArca: FVAL).
FVAL, which tracks the Fidelity U.S. Value Factor Index, debuted last year as part of a broader suite of smart beta offerings from Fidelity. That group of funds represented Fidelity’s initial foray into the fast-growing smart beta ETF space.
FVAL covers large- and mid-cap U.S. companies that have attractive valuations. Components exhibit historically high free-cash-flow yields, low enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization), low price to tangible book value and low price to future earnings.
FVAL, which debuted in September, is higher by nearly 9% year-to-date and hit an all-time on Wednesday. The ETF holds 130 stocks and is something of a departure from the standard value strategies that are often heavily allocated to the energy and financial services sectors. While financials are FVAL’s second-largest sector weight, the ETF’s combined financial/energy weight is barely over 20%.
Perhaps surprisingly, FVAL’s largest sector weight is 22.5% to technology. FVAL’s top three holdings are all technology stocks – Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT) and Google parent Alphabet Inc. (NASDAQ: GOOG).
Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations, especially as the U.S. equities market moves toward the ninth year of an extended bull run.
FVAL’s top 10 holdings combine for 22.7% of the ETF’s weight and the ETF sports a price-to-earnings ratio of 16.3, according to issuer data, putting it below the S&P 500 on that metric. The annual fee on FVAL is 0.29%, or $29 on a $10,000 investment, which is reasonable among smart beta strategies.
For more on smart beta ETFs, visit our Smart Beta Channel.
Tom Lydon’s clients own shares of Apple, Alphabet and Microsoft.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.